Agricultural Marketing ECON 337: Agricultural Marketing Chad Hart Assistant Professor chart@iastate.edu 515-294-9911 1

Livestock Marketing Decisions Where to sell Type of market Location What to sell Live, carcass, grid When to sell Weight, grade, costs

What to Sell Live weight One average price for all live pounds Negotiated price before delivery or at auction Weighing conditions important Mud, shrink (fill, time, stress) Was most common for hogs but not now Still common in large cattle feedlots, less in Iowa Used for feeder cattle and feeder pigs

What to Sell Carcass weight (“in-the-meat”) One average price for all carcass pounds Negotiated price before delivery Dressing percent (also called yield) Important to compare bids Not important in determining value Farmer stands risk of trimming and condemnation Common for fed cattle in Midwest Weighing conditions not a factor for carcass weight sales. 4

What to Sell Dressing percent DP impacted by: DP = carcass weight / live weight DP hogs approximately 73-76% DP cattle approximately 61-64% DP impacted by: Weighing conditions Shrink Fat thickness Genetics

What to Sell Value-based marketing Each carcass evaluated and priced individually Premiums and discounts determined ahead of delivery Base price may be negotiated or come from formula Carcasses are graded and values assigned Farmer stands grading risk Different buyers have different systems Nearly all hogs Increasingly popular for fed cattle

Hog Carcass Weight Discounts Range 145# -30.00 -12.90 155# -6.02 165# -15.00 -2.58 175# -3.25 2.25 185# -1.50 4.00 195# 0.00 4.50 205# 215# 4.25 225# 1.00 Range of discounts reported by packers to USDA by carcass weight of hogs. For example, a 175# carcass received a $2.25 premium at one packer, but a $3.25 discount at another packer. IOWA/MINNESOTA DAILY DIRECT NEGOTIATED HOG PURCHASE MATRIX LM_HG204, Fri, Feb. 17, 2012, USDA Market News Des Moines, Iowa 7

Hog Carcass Price by Backfat and Loin Eye Area Hog Carcass Price by Loin Eye Area/Depth (inches) Backfat 4.0/1.4 5.0/1.7 6.0/2.0 7.0/2.3 8.0/2.7 0.40 79.00 89.75 80.50 90.75 81.50 92.25 82.50 93.75 83.00 94.75 0.50 76.00 88.75 91.50 82.00 93.00 94.25 0.60 88.00 0.70 87.50 0.80 75.00 87.00 0.90 86.50 1.00 73.00 84.50 1.10 72.00 82.75 1.20 82,75 1.40 68,50 70.02 72.14 73.71 75.27 Range of prices reported by packers to USDA for a 185 pound carcass but differing backfat thickness and Loin Eye area. For example, the range of packer bids for a hog with 0.8 inches of backfat and 6 square inch LEA was from $79.00 to $88.75, a $9.75/cwt price difference for the same hog at two different buyers. National Daily Direct Prior Day Hog Report, Plant Delivered Purchase Data LM_HG200, Fri, Feb. 17, 2012, USDA Market News Des Moines, Iowa 8

Comparing Bids Let’s say you raise hogs halfway between two packers (so transportation costs are the same to both packers) Packer A offers you $65.00/cwt. live for your hogs Packer B offers you $82.00/cwt. carcass for your hogs Packer B will grade the carcasses, paying premiums for lean carcasses (+$1.25/cwt.), but charging a $0.75/cwt. sorting discount You expect a dressing percentage of 75%

Comparing Bids Price in appropriate $/cwt A B Bid Price (live) $65.00 --- Bid Price (carcass) --- $82.00 Lean premium --- +1.25 Sort discount --- -0.75 Dressing percentage --- 75 Adjusted to live 65.00 61.88 Transportation -.35 -.35 Net farm gate price $64.65 $61.53

Value-Based Cattle Marketing Three factor impact premiums 1. Carcass Weights 2. Quality Grade Distribution (USDA Grader) Based on marbling, proxy for eating experience 3. Yield Grade Distribution (USDA Grader) Based on lean meat yield 4. Other specs: Product safety & quality assurance Acceptable color Youthfulness

Value-Based Cattle Marketing Common Ground for Targets 1. Carcass Weights 550 - 950 lbs 2. Quality Grade > Se+ or > Ch0 3. Yield Grade 1’s and 2’s

Carcass Merit Grid and Premium Trends

Grid Rewards & Discounts Base: Choice YG3 550-900 lbs. Quality Grade $/cwt Prime: $6.00 Certified Angus: $1.00 Select -$9.00 Standard -$18.00 Other -$30.00 Yield Grade $/cwt 1: $2.00 2: $1.00 3: Par 4: -$15.00 5: -$20.00 Carcass weights $/cwt Under 550 -$19.00 900 & up -$19.00 Grids are more complicated than cash or in the meat pricing, but get closer to the true value of the animal. Different grids have different premiums and discounts to try to attract a particular type of cattle. 16

Comparing Bids ($/carcass cwt) Price in appropriate $/cwt A B Base bid price 121.00 121.00 Prime 3% --- +6.00 Top 2/3 Ch 45% --- +3.50 Select 30% --- -8.00 Yield 1&2 60% --- +2.50 Off weight 3% --- -15.00 Transportation -0.65 -0.65 Net farm gate price 120.35 120.76 Bid A is a straight in the meat bid, Bid B is a valued-based bid. The producer is deciding whether to accept bid A with certainty or bid B in which he is estimating the grading percent. His actual price will depend on the actual grade which won’t be known until after the cattle are slaughtered and graded. 17

When to Sell Classic production function Optimal selling weight is where marginal costs=marginal revenue The cost of the next pound = the price of the next pound Cost per pound decrease then increase with weight Costs are a function of Genetic potential Cost of diet Opportunity costs of future production Price per pound increases then decreases Weight discounts outside optimal range Fatter carcasses are discounted Adding extra weight Livestock marketing is complicated because livestock are not storable like grain. As a result cost of production changes daily as does the value of the animal. 18

MC $ MR Weight

Market Timing Cycles Seasonals Marginal costs and returns

All Cattle & Calves, Jan. 1 Inventory 21 21

All Cattle & Calves, By Cycle 22 22

Hogs

Class web site: http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2012/ Lab in Heady 68